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Opalesque Futures Intelligence

Opalesque Futures Intelligence - October 2013

Monday, October 21, 2013

How easy is it to beat a managed futures benchmark? In this issue of Opalesque Futures Intelligence, Lorent Meksi reveals a study that shows using past returns performance alone is among the worst potential indicators of future success. Understanding risk management, he argues, is more suitable.

After this we move to Campbell & Company, a large CTA who has had success in raising assets since they were last profiled but also in displaying strong risk management during periods of beta market weakness. We sit down with Campbell’s president, Mike Harris, for an in-depth look at how one of the original trend followers altered their algorithm to offer broad managed futures market environment exposure - and the interesting results relative to risk management.

It's been said on many occasions that when managed futures finds performance, the investment category could grow on an even more spectacular basis. Which leads to the interesting question: is there a managed futures capacity limit? We explore this in an interview with Newedge's Ryan Duncan and then a white paper on the topic from the brokerage firm's research team of Galen Burghardt and Lianyan Liu, who partnered with Cantab Capital's Ewan Kirk. After this we have an interest rate piece from Nash Dykes and Christopher Keenan from Welton Investment Corporation who consider the historical performance of managed futures during a rising rate environment.

After this industry consultant Amira Roula considers systematic trend following models in her recent study of the IASG database relative to a number of factors, including strategy returns distribution. From here Chad Burlet, a former Goldman Sachs ag trader and former member of the Chicago Board of Trade Board of Directors provides his insight into recent activity in the grain markets. This issue ends with a troubling article on AlphaMetrix, revealing a number of new insights into the firm’s apparent demise.

But this issue starts with a bang. Constance Hunter, the thoughtful KPMG economist, talks frankly about Janet Yellen, the US debt situation and the potential for China to create a gold-backed currency to rival the US dollar as the reserve currency of choice. This leads to the debt crisis and our current fascinating moment in history.

This past month the US Congressional Budget Office (CBO) released a much anticipated report on the eve of the debt ceiling debate, spotlighted in a Barron’s cover story titled “What, Me Worry?”

The optimistic version of the CBO number crunching on US can kicking and deficit spending shows debt growing to an unsustainable 100% of annual economic output by the year 2038 - a mathematical point of implosion. More realistic projections, however, put together by the CBO as well as quantitative hedge fund managers who have been watching the debt crisis, peg the actual date closer to the year 2023 - that is until US unfunded liabilities come into play. As Boston University economist Lawarance Kotlikoff first pointed out in 2011, and spotlighted in an article by Bloomberg’s Peter Coy, as baby-booming seniors begin to retire over the next several years the US government will be faced with nearly $300 Trillion in unfunded liabilities - enough to cause significant if not fatal damage to the economy much sooner than 2023 - that is until US unfunded liabilities come into play. As Boston University economist Lawarance Kotlikoff first pointed out in 2011, and spotlighted in an article by Bloomberg’s Peter Coy, as baby-booming seniors begin to retire over the next several years the US government will be faced with nearly $300 Trillion in unfunded liabilities - enough to cause significant if not fatal damage to the economy much sooner than 2023. Interestingly, JPMorgan CEO Jamie Dimon joined the choirs of fund luminaries Ray Dalio, Bill Gross and Stanley Druckenmiller in warning that if the US debt situation isn’t addressed it could lead to catastrophic consequences. For his part, Dimon noted it's only a matter of time before the bond market turns against a lack of discipline. Markets being forward looking, if tough solutions are not found we could see market tremors starting as early as 2014 and continuing for a decade or so.

The CBO report should have framed the debt ceiling debate around the real problem of a coming economic implosion - a strong enough consequence to encourage understanding of the unpopular solutions with Social Security, Medicare, taxes and national defense that are required to solve the problem. Unfortunately that wasn’t the case. Instead of addressing the critical issues on the horizon, US Senator Ted Cruz (R-TX) took the lead and decided to make the debt ceiling debate about the losing issue of “Obamacare,” a clouded topic even astute Republicans don’t fully understand. This represents a missed opportunity in history.

The government shutdown witnessed over the past several weeks could be a dress rehearsal for a future reality that includes sudden Draconian budget cuts if the real problem isn’t addressed, an issue raised in the Barron’s article. The reality is that facing the real issues will require politically unpopular decisions that won’t get someone re-elected. In debt crisis discussions you either believe in magic or math. For all practical purposes solving the problem requires a President in his second term, such as Obama. But if Obama doesn’t make the tough decisions, the next possible presidential second term is 2020 – and by then it may be too late to make the tough choices to avoid the ultimate societal implosion. But one thing is certain: not discussing the real issues - including the very real consequences - is certain to make sure politicians don’t feel pressure to solve the most important issue of a generation.

I hope you enjoy and benefit from this publication.

Best Regards,
Mark Melin,
Editor
Melin@Opalesque.com

Opalesque launches new comprehensive Managed Futures resources website

We invite you to register at our new comprehensive Managed Futures resources website www.uncorrelated-investments.com where you will have access to free tools like:

  • Managed Futures Academy: Comprehensive educational resource
  • Video Tutorials: Understanding CTAs and their performance drivers
  • Video Portraits: Meet some of the most successful managed futures managers
  • Mark Melin's Industry Insider's Blog
  • Needs Analysis: This interactive test helps you to determine your managed futures knowledge level.



 
This article was published in Opalesque Futures Intelligence.
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